Insurance Post

An unpalatable dish.

The once cosy world of credit insurance has become more complex and pressurised and looks like becoming the meat in a series of uncomfortable sandwiches. The problem, says Richard Willsher, is that most UK firms don't credit insure.

On the face of it every business needs credit insurance. Every
company faces the risk of protracted default or bankruptcy among its
clients or customers regardless of which market it operates in.

In times of tight margins, the need should be even more acute, as Steve
Howells, national sales manager at Euler Trade Indemnity, points out.

"If a company is operating on a 5% profit margin, a £10,000 bad debt would
require £200,000 of additional sales to make good the lost ground." So why
then do so few business take out credit protection?"

According to Euler's estimates, only 7% of all UK businesses that would be
eligible for credit insurance - that is those that deal with other
businesses on credit terms - take it up. Out of around 150,000 businesses
that could benefit from credit insurance, only 14,000 or so do, although
by volume of sales nation wide, the proportion would be much higher. There
are several reasons for this.

Reasons for non-take up

Following new European and UK legislation on late payment, small companies
in particular may feel that they have sufficient protection. Businesses
that are paid under letters of credit for example do not need cover.
Neither do those which discount their receivables on a without recourse
basis, for example in the forfaiting (non-recourse export financing)

Then there are those who do not recognise or understand credit risk, and
therefore do not think about credit insurance. Other companies feel that
their risks are low because the customers are good credit risks and have
never let them down.

Exports are often treated differently and one small exporter of electronic
machinery based in the north of England comments that he only credit
insures his exports. However, the Survey of International Services
Provided to Exporters, commissioned by The Institute of Export and NCM
Credit Insurance and carried out in July, found that only 43% of exporters
surveyed credit insured their exports.

The same survey found that price was a major consideration in determining
whether companies took out credit insurance. At times when the costs of
sales are firmly under scrutiny, one area where economies could be made
was in insurance premiums, and this at a time when there is pressure on
insurers to increase premiums to meet the cost of increased risk.

If lack of demand is one concern for credit insurers, the threat of
increasing risk is certainly another. "We are living in the most dangerous
time of our lives as far as risk is concerned," says Terry Bridgman,
managing director UK NCM Credit Insurance, the UK's largest insurer of

He list the factors as:

- Trouble in the Asian markets;

- The global economy where governments cannot control the ups and downs in
their own economy;

- Foreign currency borrowing among companies in markets with soft and
volatile exchange rates;

- Major pressure mounting in markets which appear to be doing well such as
the US and in the UK;

- Y2K - this could have a huge impact on claims next year and nobody can
call the extent of the damage.

Neil Ross, head of trade credit at Lloyd's underwriter Hiscox, says the
last 18 months have been "difficult". He talks of a chain of global events
that have demonstrated how interlinked the world's economies are. Currency
crises, for example, can lead to corporate defaults and bankruptcies as
overseas debtors, particularly in emerging markets, struggle to meet their
foreign currency obligations to suppliers.

This view is echoed by Bridget Taxy, UK managing director of Coface LBF,
who adds that she has never known a period when the credit insurers have
faced such risk concentration. Worryingly, the credit insurers have been
assisted by the buoyancy of the US economy, where prospects have now
started to look less rosy.

In such circumstances, well-developed credit management skills among
companies selling domestically and overseas are becoming vital. However
they are not always as good as they might be.

Patchy attitudes

Inevitably, the larger number of client companies of credit insurers are
smaller firms simply because there are more of them. But attitudes to
credit checking and credit control among smaller businesses can be patchy.
One of the key 'products' which credit insurers are now selling is
assistance with this.

NCM and Coface have both developed a small company-orientated offering
which aims to upgrade their client companies understanding and control of
credit risk.

Ralph Snedden, deputy chief executive of Euler Trade Indemnity, points out
that credit insurance is not pure insurance. It is as much a service

However, there can be feelings of suspicion among smaller businesses that
they are unfairly treated by the credit insurers. Firstly, as one small
clothing sector exporter says, he cannot obtain cover for a customer in a
Latin American country but when talking with larger competitors he
discovers they are getting cover for that customer because they have a
larger turnover to negotiate with the insurer.

Secondly, credit insurers wield enormous power over what business can and
cannot be done. Those companies for whom cover cannot be obtained can
suffer because suppliers will not deal with them because they cannot

This is a catch 22 of a situation analogous to obtaining a credit card
when your personal credit record has become besmirched. Some may argue
that as ownership of Europe's credit insurance companies becomes more
concentrated in fewer hands (see table, left)) this may serve to distort
and restrict trading conditions.

Meanwhile, at the big company end of the market, research from Hermes
Credit Services has shown there is a trend away from pure credit

"Companies plan on self-insuring more in the future," the report

"In particular, by adopting a more integrated approach to risk
management." Credit risk is one of the risks included in this

Richard Reddaway, group insurance manager at Glaxo Wellcome and former
chairman of the Association of Insurance and Risk Managers, agrees that
the trend among larger, multinational firms is towards a more holistic
"multi-year, multi-line approach".

This involves the use of captives in many cases and reinsurers are invited
to structure solutions to the overall risk package. This is a far cry from
traditional whole turnover credit insurance.

Narrowing of target group

In addition, if you further subtract from the market available to the
credit insurance sector those risks covered by the officially supported
export credit agencies such as Britain's ECGD and the private political
risk market, the target group of potential clients for credit insurers is
being narrowed.

The credit insurers feel that they themselves may be partly to blame for
not getting their message across as clearly and as widely as they might
have done.

In the distant past the UK market tended to be divided up between Trade
Indemnity for domestic business and ECGD's short-term arm later bought by
NCM for exports.

Today there is much more competition. Players such as Hermes, Coface and
Gerling Namur have added to the competition. At the same time the Lloyd's
market now offers capacity to syndicate trade credit deals up to £100m in
size, depending on the risk.

This market has grown since the mid 1990s with companies like Hiscox, TUA
and HIH offering balance sheet protection in various forms with trade
credit terms reaching out to five years or longer.

Against this background of increased competition, the credit insurers have
had to try to raise premium levels to allow for the higher risk
environment they are now living in.

NCM has raised its premiums in the range of 6-8% this year so far, and
Coface LBF confirms that it has increased the "risk component" of its
premium charge by a good deal more than that, although Ms Taxy is not
expecting further increases in the foreseeable future.

The once cosy world of UK credit insurance has become more complex and
pressured from a variety of angles. It seems to be trapped between
increased risk on the one hand and a restricted ability to raise premium
rates in the face of competition on the other.

The vast bulk of UK firms do not credit insure and don't see why they
should, despite tight trading conditions.

Mr Bridgman notes that while some in Westminster are talking up the
economy, the reality is that it is a time of tough trading conditions for

The credit insurance sandwich is not just a jovial and convenient turn of
phrase. The credit insurance industry is a bellwether for the economy.

If it is being squeezed, then it reflects what is affecting business
throughout the land.

That is a recipe for hard times ahead for the UK and maybe for the rest of
Europe too, which in the end no amount of spin doctoring can make more


Euler Trade Indemnity. Euler's parent is owned 68.2% by AGF, 11.8% by SCOR
and 20% by Swiss Re. Allianz owns 51% of AGF.

It insures £70bn of credit risk worldwide, making it the world's largest
credit insurer. Measured by insured turnover, Euler reckons to have 44% of
the UK credit insurance market.

NCM. NCM is part of the Dutch group of the same name which in turn is
majority owned by Swiss Re. It is the UK's largest insurer of short-term
export credit.

Together Euler TI and NCM are reckoned to share 80% of the short-term
credit insurance market in the UK.

Coface LBF. A subsidiary of The Coface Group of France, which claims to be
the world's leading supplier of export credit insurance, Coface LBF offers
private market credit insurance, credit and financial information and
receivables management.

Hermes Credit Services. Owned 100% by Hermes Kreditversicherungs-AG, in
turn owned by Allianz. Specialises in providing credit insurance services
structured to serve larger corporates with international operations.

Gerling Namur. Part of the Gerling insurance and financial services group,
Gerling Namur is headquartered in Liege, Belgium. Specialises in credit
risk and credit management and operates through 60 local offices in 21
countries and serves 8000 clients.
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